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Mining slowdown to spark Cup day rate cut

Jason Cadden

The Reserve Bank of Australia's (RBA) six-year Melbourne Cup streak is set to continue.

On the day of the race that stops the nation, the central bank is expected to make its seventh consecutive November change to the cash rate.

Twelve of the 15 economists surveyed by AAP said the RBA will cut the cash rate by a quarter of a percentage point to three per cent on Tuesday after the board of the central bank meets.

The struggling global economy and the sluggish performance of non-mining sectors of the domestic economy have driven previous rate cuts.

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However AMP chief economist Shane Oliver said the recent fall in commodity prices and the slowdown in the once-booming mining sector had also become a factor.

"Mining will still stay high, but some time next year mining investment will peak as a share of GDP (gross domestic product).

"Its contribution to GDP growth will steadily decline.

"That will potentially leave a bit of a hole in the economy that will need to be filled by non-mining parts of the economy, hence the need for lower interest rates," Dr Oliver said.

The most recent rate cut was in October, by a quarter of a percentage point to 3.25 per cent, in response to a weakening outlook for global economic growth.

That cut was the fifth interest rate cut in the past 12 months.

RBA governor Glenn Stevens said, in a statement accompanying the October 2 rate cut, that as long as inflation was expected stay within the central bank's target range of two to three per cent, it could afford to respond to the weaker global growth outlook.

RBC currency strategist Michael Turner said there was still a case for the cash rate to be cut and that the RBA board had shown it liked to stay on the front foot when it wanted to ease monetary policy.

"Overall, the global outlook is pretty weak and it hasn't stabilised yet.

"We think that will help along with a fairly soft domestic economy," Mr Turner said.

"We suspect the domestic economy is taking a little bit more of the RBA's focus that it was around mid-year, but nonetheless most of the globe still looks to be weakening with the noticeable exception of China and that's one of the reasons why they might want to hold off."

NAB chief economist Alan Oster said the RBA's focus had clearly switched to the end of the mining investment boom.

"The drop in commodity prices over the past few months had brought their (RBA's) policy dilemma into clear focus: the end of the mining investment boom had popped up over the horizon; commodity prices are on a downtrend, which will cut into national income," he said.

Mr Oster said the Australian dollar had not fallen enough for the non-mining sectors of the economy, which were the most sensitive to foreign exchange movements.

"It is these industries which will need to pick up the slack as mining employment starts to reverse in the production/export phase of the mining boom."